Hawkish Bank of England hikes rates, and there’s more to come
The recent decision by the Bank of England (BoE) to raise interest rates to 4% suggests a more aggressive monetary policy stance amid persistent inflation pressures. Per the full note from ing-think, the central bank anticipates one more rate hike by February 2024, with the possibility of bringing this forward should energy prices spike further. The fact that even the traditionally dovish members of the committee supported the hike reinforces the BoE's commitment to combatting inflation, which it now expects to peak at 4.9%, a revision upwards indicating increased pressure from energy prices.
What the desk is arguing
The desk asserts that the Bank of England's rate hike signals a shift towards a more hawkish outlook, reflecting concerns over rising inflation. Per the full note from ing-think, the unanimous support for this decision, including from dovish members, emphasizes the urgency the Bank feels in addressing inflation, which is now projected to peak at 4.9%. This change in stance indicates a trend towards tighter monetary policy that traders should closely monitor.
The expectation of another hike by February further emphasizes this cautious but proactive approach. The bank's current projection and the votes from all members suggest a stronger consensus for fighting inflation than previously indicated. However, the desk acknowledges that consensus may weaken if second-round effects do not materialize in coming data prints.
Where it sits in our coverage
Our current view aligns with the consensus target of 1.075, with projections across the market varied but concentrated around 1.04 to 1.12. For instance, notable targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This analysis suggests we are positioned towards the upper bound of the market spectrum in terms of expected moves in response to monetary policy shifts.
How other firms see it
Many firms echo the sentiment of increasing hawkishness, with jpmorgan aligning closely with our view. However, bofa stands in contrarian territory, advocating for more cautious forecasts. This divide highlights differing interpretations of inflation pressures going forward.
Relevent currency pairs include EUR/GBP as the BoE's rate path influences its trajectory and may shape broader market expectations. The interplay between resulting market reactions and these policy shifts will be key in the upcoming trading sessions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01BoE raises rates to 4%, expects another hike by February 2024.
- 02Inflation forecast now at 4.9%, impacting rate decisions.
- 03Consensus among central bank members points to a hawkish shift.
Market implications
Traders should watch for GBP/USD movements around the 1.075 mark as the BoE's rate policy continues to unfold. Additionally, any shifts in inflation data could prompt earlier market reactions, particularly leading up to the next rate-setting meeting.
Risks to this view
If inflation data fails to show upward pressure or if energy prices stabilize, the narrative of ongoing rate hikes could unwind, potentially reversing the positive outlook for the GBP. A lack of domestic inflationary drivers would especially challenge the need for further tightening.
Older quick take Quick take Published 12:50 United Kingdom Translate Hawkish Bank of England hikes rates, and there’s more to come The Bank of England has raised interest rates to 4pc, and we expect one further rate hike by February. A renewed spike in energy prices could bring that forward to December. However, we're still sceptical that the Bank will need to hike more than once more The Bank of England has raised interest rates for the first time in three years Every bit of the latest Bank of England decision to raise rates from 3.75% to 4% is more hawkish than expected.
First, even the two arch-doves voted for a hike, meaning every committee member opted for higher rates. Second, the Bank now sees inflation peaking at 4.9%, above our own, and indeed most other economists’, predictions. And third, some – though not all – officials are more forthright than we’d expected about a probable need to tighten policy further.
This reinforces our view that the Bank of England will hike rates again by February, potentially as early as December. But as things stand right now, the consensus behind the next hike is likely to be much weaker. The two doves – Dhingra and Taylor – are clear that they think this is a one-off insurance hike.
Breeden and Ramsden appear to make further tightening at least partly contingent on second-round effects emerging in the data. And Governor Bailey, though pretty clear that he thinks the Bank will need to hike again, remains sceptical about the need for much more tightening beyond that. This all comes back to the awkward position the Bank finds itself in.
It now sees inflation well above 4%, but its latest forecasts reveal this is almost entirely energy-driven – with a gradual pick-up in food inflation baked in too. At least until March next year, it expects services inflation to stay broadly flat, and this remains the key barometer of domestically-driven price pressures. No data received so far – be it hard data on prices/wages, or surveys – points to signs that the energy shock is broadening across the inflation basket.
Remember too that today’s forecasts were made before the latest downward move in energy prices. Instead, this is a hike solely about the risks. Bailey explicitly says that companies have been shielded by longer energy price fixes and hedging more generally – resilience that won’t last indefinitely.
In other words, the Bank will need several more months of data to be sure that the upside risks to inflation aren’t materialising. Implicit in today’s decision is previous BoE research, showing that second-round effects become more likely when inflation exceeds 4%. How our BoE forecast compares to markets Source: Macrobond, ING "> Source: Macrobond, ING Our view is that, against a backdrop of a cooling jobs market, tight fiscal policy and already-restrictive interest rates, the risk of second-round effects is considerably lower than it was in 2022.
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